Posted on: 24 June 2020
Quadrant Chambers’ Robert-Jan Temmink QC and Stephanie Barrett say that in the current pandemic and consequent lockdown UK company directors face many challenges and risks in an article, which is part of a series focusing on legal aspects of force majeure and business disruption in the light of the Coronavirus and its fall-out.
The UK Government has recently announced that wrongful trading liability under Section 214 of the Insolvency Act 1986 will be suspended for an initial period of 3 months in order to alleviate directors’ concerns about personal liability when deciding whether or not to continue trading. However, other duties and routes to personal liability remain in place and directors are by no means ‘off the hook’. This article examines the impact of the suspension of wrongful trading liability and gives some advice on best practice for directors seeking to minimise the risk of liability should the company later enter an insolvency proceeding.
The COVID-19 pandemic has changed everyday life immeasurably in a short space of time, and presented businesses with a range of serious challenges, both in the short term and for the future. Many businesses are facing their toughest trading environment in living memory and some have been forced by lockdown measures to stop trading altogether. With no certainty as to how and when the current lockdown will end, many company directors face the difficult task of deciding whether to enter an insolvency procedure, or to try and trade out of a position of cash-flow or even balance-sheet insolvency.
As company directors try to meet the immediate challenges to their business on a daily basis, they may well be mindful of the potential risk that they will be held personally liable for their current actions. Although, as set out below, the UK Government is trying to reduce directors’ anxieties in this regard by suspending wrongful trading liability under Section 214 of the Insolvency Act 1986, English law imposes a number of other specific duties on directors that must be complied with even in these extraordinary times.
Directors’ duties and liabilities – the factual position
Directors’ duties under English law derive from a variety of sources, principally common law, the Companies Act 2006 and other statutes, for example health and safety, employment and environmental legislation. The 2006 Act codified long-standing (and perhaps common-sense) duties, as a reminder:
- to act within their powers according to the company’s constitution and only exercise powers for the purposes for which they are conferred (section 171);
- to act in a way that they consider in good faith will promote the success of the company for the benefit of its members as a whole (section 172);
- to exercise independent judgment when fulfilling their duties (section 173);
- to exercise reasonable care, skill and diligence (section 174);
- to avoid actual or potential conflicts between the director’s interest and the interests of the company, and not to exploit or profit from their position within the company (section 175);
- not to accept benefits from third parties conferred by reason of being a director or doing (or not doing) anything as a director (section 176);
- to declare any interest in proposed or existing transactions or arrangements with the company to the board (sections 177–182).
These general duties, owed to the company, are cumulative (section 179) and, in the event of wrongdoing, it is not uncommon for a director to be held in breach of more than one of them.
The general duties are focussed on the director’s duties to promote the company’s success in the interests of its shareholders. However, when the company is insolvent or likely to become so, the directors are then required to act primarily in the best interests of the company’s creditors as a whole, maximising (or at least preserving) the value of the company’s assets.
As is well-known, a company can be insolvent in cash-flow terms if unable to pay its debts as they fall due, and/or in balance sheet terms, where its liabilities are more than its assets at a given time (see section 123 of the Insolvency Act 1986). At present, with large sectors of the economy shut down and many businesses unable to generate revenue but still liable to meet fixed costs, it is anticipated that a large proportion of otherwise viable companies could find themselves technically insolvent.
In an insolvency context other potential claims against directors also arise. Apart from wrongful trading (which will be dealt with below) the 1986 Act provides a range of remedies against directors and ex-directors of companies in liquidation. For instance, pursuant to section 212 any director who has misapplied or retained, or become accountable for, any company money or other property or who has been guilty of any misfeasance or breach of duty can be ordered to repay, restore or account for that property (plus interest) or to pay such compensation to the company as the court thinks just. Breaches of duty in this context include negligence and breaches of the general 2006 Act duties set out above. Section 213 of the 1986 Act provides that directors who are guilty of carrying on company business with intent to defraud creditors can be ordered to make contributions to the company’s assets.
Furthermore, certain transactions can be set aside or clawed-back in the event of liquidation or administration. The most common examples are transactions at an undervalue (section 238) and transactions amounting to unlawful preferences of particular creditors, sureties or guarantors (section 239).
It should also be noted that where a company has become insolvent a director may be disqualified from acting as a director pursuant to the Company Directors’ Disqualification Act 1986 if his conduct makes him unfit to be concerned in the management of a company. There are also numerous criminal offences under the Insolvency Act 1986 relating to fraudulent conduct e.g. in relation to falsification of company books or false representations to creditors (see Sections 206–211).
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